Here are 2 charts of the NF and the BNF which show the Profile or the kind of auction taking place in the market.
These are day session charts with the blue area showing the volume traded at price and to the left of it we have the TPO charts which represents Time Price Opportunity or the opportunity created by the interaction of price with time at a particular period at a given time.
We prefer these charts over regular bar or candle charts as they give a 3 dimensional view of the interaction of price, volume and time.
This interaction is what creates value and in these charts are main purpose is to see where value is created and the movement of price away from it which gives us great trading moves.
To understand the chart above we have to understand what happens in the market place.
We have a buyer and a seller who meet up and agree at a given price to get a deal. An interaction of many such buyers and sellers creates a market.
They keep exchanging price between themselves as price moves horizontally . This horizontal movement creates value or the value area as we call it.
Soon either the buyer or the seller will start feeling (based on new information) that the price is not fair and they start moving the market up or down as the case may be.
In the example above the first red rectangle in a larger value area comprising of several day transactions each with their mini definition of value.
Soon the buyers felt that the price was not fair and they moved the market up.
Now what happens is that the price would continue moving up till the last of the buyer has bought. This creates an unfair price or excess as we call it in market profile.
This excess once created shuts off the up auction and the movement back to value begins again.
We saw this movement on RBI day.
Once we came to the top of value the sellers took control of the market again and drove price to the lower end of the range seen.
The current profile in Nifty shows that the buyers and sellers are equal in the chart we are looking at, but in banknifty we are still seeing the seller dominate the auction, The individual profiles still show small excess at the top which means that the seller controls.
There are many other concepts we outline in Market profile but the core has always been the interaction of buyers and sellers and the relationships between them which creates value at times and excess ay others.
Stay neutral when market is in value and go with one party who controls the excess.
It's as simple as that.
We have a trading room where we try to understand this behavior everyday and take trades based on it.
If you are interested to know more about this study, then send us an email to email@example.com.